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MoD to fully reimburse 18% GST on defence R&D grants
A big government office in India, called the Defence Ministry, has decided to help small companies that invent things for the army.
These companies receive money, called grants, to build new military products.
But when they got this money, they had to pay an 18% tax called GST.
The Defence Ministry decided this was not fair, because government offices did not have to pay the same tax.
A newspaper pointed this out in March 2025, and the Defence Ministry started fixing the problem.
In July 2025, the Ministry said it would give the tax money back.
Later, people were confused about how much money would be returned.
In July 2026, the Ministry said companies will get all of the tax money back, no matter what.
The fix is temporary while a bigger group called the GST Council decides on a permanent rule.
This is good news for startups and small businesses that make products for India's military.
The Ministry of Defence issued an office memorandum on July 27 clarifying that the full 18% GST on defence R&D grants will be reimbursed, irrespective of the Input Tax Credit claimed.
The reimbursement applies to grants provided through the iDEX schemes and the Technology Development Fund (TDF), which is managed by the Defence Research and Development Organisation (DRDO).
The move follows a businessline report from March 10, 2025, that flagged the double standard of slapping 18% GST on private R&D grants while exempting government entities from a similar tax.
The MoD said the decision, taken in consultation with the Department of Revenue and the Ministry of Finance, is an interim arrangement while GST Council deliberations on tax waivers are pending.
The Defence Acquisition Council has granted Acceptance of Necessity for over 30 iDEX products, with procurement contracts surpassing ₹1,000 crore, and TDF has over 79 sanctioned projects valued at ₹334.02 crore.
- Who
- The Ministry of Defence (MoD) of India, in consultation with the Department of Revenue and the Ministry of Finance, and defence startups and MSMEs receiving R&D grants under the iDEX schemes and the Technology Development Fund (TDF) managed by DRDO.
- What
- The MoD clarified that the full 18% GST paid on defence R&D grants will be reimbursed regardless of the Input Tax Credit claimed, and approved reimbursement for grants under the iDEX and TDF schemes.
- Where
- India, at the national level through the Ministry of Defence and GST Commissionerates across the country.
- When
- The clarifying office memorandum was issued on July 27, 2026, following an initial reimbursement decision on July 18, 2025; the article was published on August 5, 2026.
- Why
- To address the tax disparity in which private startups and MSMEs paid 18% GST on R&D grants while government entities were exempt from levying a similar tax, after the issue was highlighted by businessline in March 2025.
Defence startups and MSMEs
Government tax authorities
GST on defence R&D grants
Defence startups and MSMEs
Private startups, MSMEs and institutions should not have to pay 18% GST on innovation grants for defence R&D, especially since government entities were exempt from levying a similar tax; taxing innovation was seen as unfair double standards.
Government tax authorities
GST is legally required to be paid on the entire value of the grant regardless of input tax credit, and any refund is governed by the provisions of the GST Act 2017; the reimbursement is only an interim arrangement while the GST Council deliberates a permanent tax waiver.
Full reimbursement versus input tax credit adjustment
Defence startups and MSMEs
Startups and MSMEs expected the GST reimbursement to cover the entire tax paid on their grants without deductions.
Government tax authorities
A prior interpretation held that the reimbursement should be reduced by the Input Tax Credit claimed by the entities, a question the MoD settled on July 27 by clarifying that GST is payable on the entire grant irrespective of ITC.
Key facts
- GST reimbursement rate
- Full 18% GST
- Applicable schemes
- iDEX schemes and Technology Development Fund (TDF)
- TDF manager
- Defence Research and Development Organisation (DRDO)
- Clarification memorandum
- July 27, 2026
- Initial reimbursement approval
- July 18, 2025
- iDEX procurement contracts
- Surpassed ₹1,000 crore
- TDF sanctioned projects
- Over 79 projects worth ₹334.02 crore
- Governing law
- Sections 31(3)(e), 34 and 54(8) of the GST Act 2017
Quotes
Ministry of Defence (MoD)
Indian government department overseeing defence procurement and research
““Approval is hereby conveyed for the reimbursement of GST, as applicable, over and above the grant‑in‑aid provided to MSMEs and start‑ups under the TDF and iDEX schemes, based on documentary evidence and taking into account the avail of input‑tax credit, prospectively.””
thehindubusinessline.com
““GST is required to be paid on the entire value of consideration/grant irrespective of the amount of ITC claimed by the entities providing the R&D services,””
thehindubusinessline.com
Sources
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